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The Benefits of a Loan Agreement

  • It formalises the debt – meaning that there is now a contract (the loan agreement) so you are contractually entitled to be repaid
  • Security over the loan can be set out
  • Payment amounts, when they are due and how much interest is payable can all be clearly set out!

Money, money, money

Money. Do you like talking about it? Not many people do. It can make people uncomfortable, especially when discussing it with friends and family. But sometimes we have to have frank conversations about money, especially if we are borrowing or lending money to someone we know.

Maybe you have a project in mind. A business you want to start or a renovation on your house that requires more money than you were expecting. You want to ask your family member or friend to lend you the cash on a short-term basis. You’ll definitely pay it back, no worries.

Maybe a friend or family member has approached you about borrowing some money. You know why they need it and you love them so you want to help out. You’re sure they’ll repay it when they can.

It is tempting to do the deal, shake hands and then speak as little of it as possible. The conversation is just too awkward.

Use a Loan Agreement

But this is where problems begin. People can easily misunderstand intentions. Maybe one person thinks the money is a gift while the other is sure it is a loan. Maybe one person thought they could pay the money back ‘when they can’ while the other thought it would be paid back by now. Maybe you loaned money to your partner and now you have broken up and you’re not sure you will ever see that money again.

If the situation was awkward before, it is even more awkward, if not hostile now.

Forming a loan agreement can help to prevent and manage these sorts of situations. A loan agreement is what it sounds like. It is a contract in which one party agrees to lend money to another party and the borrower agrees to repay the money. Making a written agreement before lending money ensures that both parties understand and agree to the terms of the loan. It is also evidence that you can submit if the worst happens and you need to go to a court to claim any outstanding amount owing to you.

The loan agreement should be in writing, dated, signed by both parties and witnessed. It doesn’t need to be complicated if the loan is not for a large amount of money.

Key Clauses in a Loan Agreement

Here are some of the key terms to include in a loan agreement:

  • The loan amount
  • Any interest rate that is being applied (if interest is being charged)
  • Any other fees or charges
  • The repayment schedule (i.e. when payments are to be made)
  • The amount of each repayment
  • How the repayments are to be made (eg. cash, direct bank account transfer, bank cheque)
  • The due date of the whole amount
  • Details of any guarantee that has been agreed to (if someone is guaranteeing repayment of the loan – this usually doesn’t occur for personal loans between friends and family, but it could)
  • Details of security over any assets that has been agreed to
  • What will happen if the borrower defaults (doesn’t repay the loan)

Guarantee and Security Explained

Are you wondering what a guarantee or security over assets is? A guarantee is when a second person (the guarantor) signs the loan agreement as well, guaranteeing the repayment of the loan. So if the person who is borrowing the money fails to repay, the guarantor becomes liable for the loan. Not great for the guarantor but great for the lender of the money.

Security is when a borrower has an asset (such as their house, a valuable painting or artwork or something that does not depreciate – i.e. not a car) that the lender can claim against if the borrower fails to repay, i.e the lender of the money can sell the asset that was used as security in order to claw back any money that was owed to them under the loan but which hadn’t been paid back. If an asset is put up as security for a loan, it becomes a secured loan. If there is no security, it is called an unsecured loan.We are specialist contract lawyers that can help with all of your personal contract requirements. Get in touch with us today.

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